The Supreme Court, in the case of Daejan Investments v Benson (PDF) has produced a judgment that undermines protections for leaseholders of blocks of flats when faced with big repairs by their landlords – and on the face of it flies in the face of the will of Parliament in how those protections should work.

Under the Landlord and Tenant Act 1985 Section 20 any lessees in a block of flats have to be consulted regarding works done for the benefit of the whole block, the costs of which would go onto the service charges and cost more than £250 each. The main reason is that such works can be costly and lessees should have some say in the cost, their own “relevant contribution” under the terms of the lease and necessity for the work. Section 20ZA (5) of the Act outlines regulations that include lessees being given details of the works, possibly via a tenants’ association, along with estimates for the work. The lessees might suggest other builders from whom to get estimates and have other observations about how the work should be done.

Failure to consult comes with a big penalty for landlords. They can seek dispensation from a Leashold Valuation Tribunal (LVT), but if they fail they may be limited to recovering a fixed sum of only £250 per lessee for the work, whatever the actual expenditure.

Section 20ZA (1) says: “Where an application is made to a leasehold valuation tribunal for a determination to dispense with all or any of the consultation requirements in relation to any qualifying works or qualifying long term agreement, the tribunal may make the determination if satisfied that it is reasonable to dispense with the requirements.”

This was the situation for Daejan Investments who wanted to recover £280,000 through service charges for major works on Queens Mansion in Muswell Hill, North London.

In 2006 Daejan had served a notice under paragraph 4(5) of Schedule 4 to the Consultation Regulations on five lessees regarding the work that was to be done and estimates it had for the work. However, it failed to make all the estimates available to the leaseholders and proceeded to award the contracts before the consultation period was over. Daejan had offered to reduce the bill by £50,000 to take account of any prejudice to the lessees through failure to follow the procedure – while arguing there was no such prejudice.

In 2008 an LVT ruled that failure to consult had resulted in substantial prejudice to the leaseholders. It further ruled that “the financial effects of the grant or refusal of the application for dispensation on the landlord or tenant are not to be taken into account”. The sanctions for failure to follow the procedures are draconian. Unless the landlord can get a dispensation from the LVT, it would be allowed to claim only £250 from each lessee towards the work.

‘Tenants will be in the same position as if the Requirements have been satisfied, and they will not be getting something of a windfall’ – Lord Neuberger

But according to the LVT, the fact Daejan would only receive £1,250 from the five leaseholders towards the £280,000 of work was irrelevant. It was an all or nothing situation. No dispensation was given. The Court of Appeal took the same view.

It is this position that has been countered by the Supreme Court, on the face of it changing the intention and mechanism of the 1985 Act. The majority in the Supreme Court, led by the President, Lord Neuberger, held that the important issue was the prejudice that the lessees had suffered rather than how far the landlord had breached the consultation regulations.

Rather than the “all or nothing” provisions of the Act, the LVT should come to a view of how far the breach of the consultation regulations resulted in prejudice. It can then put a money value on that and, in effect, give a discount to the lessees rather than almost exempting them from the bill as required by the Act.

In effect the judgment means the burden of proof and nature of proof required to be put before the LVT have changed. Before, the lessees would have to show the requirements were not followed and the landlord would have to show why it should have a dispensation. Now the lessees must show why the landlord should not get the dispensation, proving to the tribunal that they have suffered prejudice and putting a figure on it.

As Lord Neuberger put it: “Insofar as the tenants will suffer relevant prejudice as a result of the landlord’s failure, the LVT should, at least in the absence of some good reason to the contrary, effectively require the landlord to reduce the amount claimed as service charges to compensate the tenants fully for that prejudice. That outcome seems fair on the face of it, as the tenants will be in the same position as if the Requirements have been satisfied, and they will not be getting something of a windfall.”

‘In my opinion it should be, and is, open to the tribunal to take that view in the interests of preserving the integrity of the legislation’ – Lord Hope

So in this case the LVT and Court of Appeal did not feel it necessary to arrive at a compromise figure between £1,250 and £280,000. The law lays down £250 per lessee so that is the figure.

In contrast the Supreme Court majority decided the lessees had suffered relatively minor prejudice – they had not been allowed to have an alternative contractor considered for the work. The justices considered “ the relevant prejudice to the respondents could not be higher than the £50,000 effectively offered by Daejan”.

In contrast the minority in the Supreme Court (Hope and Wilson) considered it was necessary to consider the gravity of the non-compliance with the consultation requirements. “This includes distinguishing between breaches or departures according to their level of seriousness, without having first to consider the amount of prejudice they may cause or may have caused.” Since the LVT considered non-compliance to be serious, a dispensation was not given and so the statutory figure of £250 per person was applied.

CommentPresumably when Parliament passed the draconian penalties for failure to consult it did so with a purpose. The intention was to concentrate freeholders’ minds, not to give them some form of opt-out from consultation accompanied by an offer of some small amount of compensation.

The purpose of the requirements was noted by Neuberger: “to ensure that the tenants are protected from (i) paying for inappropriate works or (ii) paying more than would be appropriate”. Apart from the lack of incentive for freeholders to get the best deals from contractors on behalf of the leaseholders (who, after all, are paying the pipers), there are clearly also potential problems of freeholders doing sweetheart deals with contractors, adding a bit to the bill and splitting the difference. Many of these cases involve local authority blocks with private lessees in them, and local authorities are often tied in to umbrella contracts that may be suited to large scale works but seem less appropriate for individual lessees. Consultation is a minimum protection and Parliament’s view was presumably that the best way to achieve protection was the “all or nothing” approach.

Lord Hope, in his dissenting judgment, puts the matter thus: “I do not think that it is fanciful to assume that there could be extreme cases where the breach or departure was so serious, or so flagrant, that it would on that ground alone not be ‘reasonable’, as section 20ZA(1) puts it, to dispense with the consultation requirements. In my opinion it should be, and is, open to the tribunal to take that view in the interests of preserving the integrity of the legislation, and to do so without conducting any such inquiry [into prejudice].”

In other words the legislation was intended to ensure transparency and consultation. The majority decision flies in the face of this intention to make consultation a mere matter of barter between the parties.

Daejan’s failure to follow the regulations properly and then turning up at an LVT hoping for post hoc sanctioning of its conduct through dispensation is not at all unusual. It will be even more likely now the Supreme Court has declared that LVTs should take into account the level of prejudice when making their decision (though lessees will first have to haggle with freeholders over some level of compensation).

The clue as to why the Supreme Court has taken this view is in Neuberger’s word “windfall” above. Clearly he considers the Act somewhat generous in allowing lessees the substantial benefits of expensive work at a tiny cost of £250. The law, on this reading, supplies a huge windfall benefit to leaseholders for perhaps technical breaches.

But if that is what the law does, it must surely be the case that that is what the law was intended to do.

Note: Here is a good piece by Coventryman on Daejan and another leasehold repairs case, Phillips v Francis, taking a markedly different line on the implications of Daejan: How do we pay for the repairs. His view is that the Neuberger decision has “dusted off” a failing s.20ZA(1) to make it a useful tool. It is fair to say that LVTs may welcome the option of giving dispensations but with conditions attached (including compensation payments for “relevant prejudice”) as opposed to the nuclear “all or nothing” option that they might be reluctant to use, to the detriment of leaseholders. But really the whole area needs reform by decent workable legislation.

Here, though is a Nearly Legal post closer to the views expressed here.
And this piece looks at practical problems for leaseholders since Daejan